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Office of Inspector General 

Review of FEMA Internal Controls for 
Funding Administrative Cost 
under State Management Grants 


January 2007 

Office of Inspector General 

U.S. Department of Homeland Security 
Washington, DC 20528 

January 9, 2007 

MEMORANDUM FOR: Margaret Young 

Chief Financial Officer 

John R. D'Araujo, Jr. 
Director, Recovery Division 

FROM. Matt Jadacki $i 

Deputy Inspector General 
Office of Disaster Assistance Oversight 


Review ofFEMA Internal Controls for Funding 
Administrative Cost under State Management Grants 
Report Number OIG-07-21 

We performed a review of state management grants that FEMA awards to states for the 
administration of public assistance programs. The objective of the review was to determine the 
adequacy of FEMA controls for ensuring that funds awarded were for essential and reasonable grant 
management activities. 

Under current FEMA policy, states can receive funding from two sources to cover operations 
associated with the administration of public assistance programs (emergency protective measures, 
debris removal, repair and restoration of buildings and other public facilities, etc.). States receive a 
statutory administrative allowance based on a sliding scale formula tied to the amount of public 
assistance awards, as well as state management administrative grants to cover needs that are unmet 
by the allowance. The latter form of assistance was the focus of this review. 

To test FEMA controls, we selected management grants awarded to the States of Louisiana and 
Mississippi for Hurricane Katrina. As of May 31, 2006, FEMA awarded $54 million in management 
grants to these states. We reviewed FEMA and state records related to these management grants, 
interviewed FEMA, state, and contractor officials, and applied other review procedures considered 
necessary under the circumstances. 

The nature and brevity of this assignment precluded the use of our normal audit protocols. 
Therefore, we did not conduct the review according to generally accepted government auditing 
standards. Had we followed such standards, other matters may have come to our attention. 

The review was conducted in conjunction with the President's Council on Integrity and Efficiency 
(PCIE) as part of its examination of relief efforts provided by the Federal government in the 
aftermath of Hurricanes Katrina and Rita. As such, a copy of the report has been forwarded to the 
PCIE Homeland Security Working Group, which is coordinating Inspectors' General review of this 

important subject. This is the second report addressing administrative costs for public assistance 
program activities. The first report, GC-HQ-06-40, dated April 28, 2006, primarily addressed 
FEMA policy regarding statutory administrative allowances. In that report, we recommended that 
FEMA comply with the Disaster Mitigation Act of 2000 and establish a single funding rate for state 
administrative costs. We also recommended that, in the interim, FEMA improve controls over the 
statutory allowance. This report addresses improvements for state management grant controls. 


FEMA approved state management grants without a comprehensive grant management plan or 
written internal procedures for assessing the need for grant assistance. As a result, controls were not 
in place to evaluate the states' needs or to ensure that funds awarded were for bona fide grant 
management activities. 

FEMA's response to report GC-HQ-06-40 addressed the above weaknesses in part. However, 
additional actions are needed. 

State Management Grant Justification 

The Louisiana Office of Homeland Security and Emergency Preparedness (grantee), received several 
awards totaling $30 million. One of the awards (Project Worksheet 337), approved $29 million for 
the retention of a consultant to support ". . .the existing state recovery staff in providing on-site 
project manager, grant management, project worksheet development, project applications, reports, 
audit and related field inspections." The approved scope of work indicated that the consultant would 
hire 160 individuals to perform these activities. 

The Mississippi Emergency Management Agency (grantee), received two awards totaling $23.4 
million to pay regular salary costs of its own disaster recovery staff and for consultant services. Of 
this amount, $20.8 million was designated for consultants to assist the State in project development, 
coordination with FEMA and sub-grantees, and for accounting support to sub-grantees. The 
approved scope of work indicated that the consultants would hire 77 individuals to perform these 

Federal regulation (44 CFR 206.207) requires state grantees to develop a state administrative plan 
for public assistance programs with procedures for accomplishing various grant management 
functions and for determining its staffing and budgetary needs. The plans must identify grant 
management procedures for damage assessments, applicant briefings, processing appeals, financial 
management, procurements, monitoring, and determining staffing needs. 


The administrative plans for Louisiana and Mississippi contained limited procedures for several 
functions, but none for financial management, monitoring, procurement, or staffing. Also, there were 
no requirements for nor did the plans address estimated workloads for grant management functions 
or the staff resources for those functions. As a result, management grants were not justified by a 
thorough analysis of grantees' needs. 

In response to report GC-HQ-06-40, FEMA's Recovery Division stated that it developed and begun 
implementing new procedures to assist grantees in preparing public assistance administrative plans. 
The new procedures provide a more detailed listing of responsibilities states assume as grantees and 
require states to develop procedures for each function, determine the number of positions needed for 
each function, and justify staffing levels. These procedures, if followed, should address the concerns 
of this finding. Therefore, we consider this finding resolved and closed. 

Request for State Management Grants 

Over 90 percent, or $50 million, of the state management grant awards was used to hire contractors 
to assist the state grantees with their grant administration functions. FEMA Response and Recovery 
Policy 9525.1 1 state that, "Reasonable costs of contractors performing eligible Grantee functions in 
managing the Public Assistance Program are eligible as State Management Administrative Costs." 
The policy also references U.S. Office of Management and Budget (OMB) Circular A-87, 2 CFR 
Part 225. 

FEMA's Office of the Chief Financial Officer (CFO) uses the general principles contained in OMB 
Circular A-87 as the primary criteria for reviewing and approving, or disapproving, state 
management grant proposals. The Circular identifies the standards for determining allowable costs 
under Federal grants and the types of costs that are allowable and unallowable. 

While the Circular is a useful tool for a general evaluation of the costs under state management 
grants, it does not identify grant management functions or other programmatic factors to consider 
when reviewing state management grant proposals. Without a clear delineation of eligible grant 
management functions for use during the FEMA review process, the potential exists for the approval 
of non-essential or questionable activities. 


We recommend that the CFO, in coordination with the Director of the Recovery Division, develop 
procedures (using the listing of eligible grant management responsibilities compiled by the Recovery 
Division) for the review of state management administrative cost grant proposals to ensure that 
funding is approved only to meet essential and reasonable grant management needs. 



On August 16, 2006, we submitted a draft report to the CFO for comment. On September 7, 2006, 
the CFO advised that they would withhold comments pending receipt of the final report. 

Please advise us within thirty days of actions taken or planned to implement the recommendation. 
Should you have any questions concerning this report, please contact Gary J. Barard at 

cc: Secretary 

Deputy Secretary 

Chief of Staff 

Deputy Chief of Staff 

Executive Secretary 

General Counsel 

Chief Privacy Officer 

Under Secretary for Management 

Under Secretary for Federal Emergency Management 

Chief Financial Officer, DHS 

Chief Procurement Officer, DHS 

Audit Liaison, DHS 

Audit Liaison, FEMA 

Chief Procurement Officer, FEMA 

Deputy Director, Gulf Coast Recovery 

Chief Financial Director, Gulf Coast Recovery 


Additional Information and Copies 

To obtain additional copies of this report, call the Office of Inspector General (OIG) at 
(202) 254-4100, fax your request to (202) 254-4285, or visit the OIG web site at 

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